Random Thoughts – market volatility, mutual funds, dividend investing

Posted on October 29, 2018

The last few weeks, the market has been trending downward. Quite a number of stocks are now near or at 52 week low prices. To take advantage of the market selloff, we have been busy buying small quantities of index ETFs like VCN and VXC with whatever cash we have in our TFSA’s and RRSP’s. And since Questrade offers commission-free ETF purchases, doing small quantity purchases makes sense.

We do have close to $11,000 saved up for the 2019 TFSA contribution. I’ve been hearing rumours that the limit may be increased to $6,000 per person thanks to inflation. If that’s the case, we would be able to contribute $12,000 total at the beginning of January. Since we have a bit of cash saved up, in theory, we can deploy that amount now, buy a bunch of stocks, and take advantage of the market selloff.

The question is, does that make sense?

To do that, it means we would need to buy dividend-paying stocks in our taxable accounts (since our TFSA and RRSP contribution for this year are maxed out). So whatever capital gains and dividend income we end up with, we have to pay taxes. If we wait till January and purchase stocks in our TFSA’s, capital gains and dividend received are all tax-free.

But that also means we won’t have any money saved up for TFSA contributions in January. We probably won’t be able to maximize our 2019 TFSA contributions until the middle of the year. Having always contributed to our TFSA’s every January since 2009, part of me really don’t want to break this positive habit.

Would the market volatility continue? Would the downward trend continue? Unfortunately, I don’t have the eight ball to predict that. My guess is as good as yours.

However, I’m a true believer that over the long term, you want to be as tax efficient as possible. Therefore, I am leaning toward the wait and see approach. Wait till January before we start purchasing anything and hope that the market will continue to trend downward.

Perhaps, though, it makes sense to deploy a few thousand dollars now and buy a stock that’s fairly or undervalued. And save up more money so we can max out our TFSA contributions by end of February or so.

What would you do?

Not having any tax-free or tax-deferred contribution left sucks, especially when you have some cash lying around. A good problem to have I suppose.

—

It was extremely difficult to write The END post. It was also very difficult to have the courage to hit the publish button. Since publishing the post I have received an overwhelming amount of support. For that, I am truly grateful and have to say thank you to everyone that has commented or emailed me. In case you are wondering, I am doing much better. Writing and publishing the post was very therapeutic. It put me in a better place and made me realize what I needed to do. Since then, I have tried to have more me-time and do more self-care.

Reading all the comments and emails made me realize how many people have faced similar struggles. Unfortunately, personal struggles, especially mental related, are often hidden, locked away, and not shared or discussed. We suppress these struggles and hope they will disappear on their own one day.

But the reality that is these things never disappear on their own. You can bury and suppress them, but that does not work forever. Eventually, things will blow up, like a volcano. And it is extremely difficult to clean up a blowup. Instead, confront the issues and struggles and try to find solutions and help. Dealing with issues and struggles head-on is much healthier in the long run.

The same concept can be applied in a relationship. Instead of suppressing conflicts and frustrations and let them build up, communicate with your partner. If you let things build up, more often than not that leads to a relationship breakup. Communication is an essential part of a relationship and can bring both partners closer together.

—-

The other day, a bunch of co-workers were discussing investments. One said that all of his investments are in actively managed mutual funds and he did not plan to change his investment plans. When I heard that, I was completely shocked and saddened how some people are severely lacking in financial knowledge.

Being somewhat financial savvy, I tried to explain to him that actively managed mutual funds were not a good idea. Here were my reasons:

The MER’s are high. He’s paying 3% or higher in terms of MER per mutual fund.

The MER eats into your return. If the fund is returning 10% and the MER is 3%, you actually only get 7% total return. That’s fine and great if you are in a bull market and the fund manages to outperform the market. What’s troublesome is when the fund has a negative return. Say it’s a bad year and the fund is returning -10%. Since the MER is 3%, you are actually losing 13%. You need to pay the high MER fee regardless of whether the fund is making or losing money!

MER also eats into your overall return. A 1% difference in MER over 40 years can cost you over $590,000!!! To make matter worse, because the MER is taken out as a percentage of the portfolio value, the larger your portfolio, the more fees you are paying! This means you are paying a lot more in MER fees when you are closer to your retirement (i.e. you have a large amount of money invested in the fund).

I then explained to this coworker that passive ETF’s that track index is a way better way to do things. First of all, the MER’s are much lower than actively traded mutual funds (and 99% of the time, lower than the passively traded mutual funds). Because these ETF’s track index, the stock turnover rates is going to be much lower than actively managed mutual funds. This is one of the reasons why the MER is much lower.

My recommendation to the coworker was to switch all of his mutual funds to index ETF’s. Investing in high MER mutual funds was a mistake I made in my 20’s and I don’t want anyone else to make the same mistake as I did. I haven’t talked to this coworker since, but hopefully he is making changes to his investments.

—

Speaking of investment, it’s great to see that so many people are interested in dividend growth stocks. After helping with a number of people reviewing their dividend portfolio as part of my coaching service, I think I have identified a common mistake.

People are starting out by buying 7 or 8 different dividend growth stocks for the sake of diversification, but they only own a few shares of these stocks. In other words, the commission fees they paid per stock purchase accounted for a large percentage of the overall transaction.

Hypothetically, say someone was starting out their dividend portfolio had the following stocks:

5 shares of Bank of Nova Scotia (~$350)

7 shares of Enbridge (~$285)

10 shares of Telus (~$450)

10 shares of TD (~700)

12 shares of Emera (~$480)

25 shares of RioCan (~$620)

16 shares of Fortis (~$740)

Total portfolio value would be around $3,625.

Now let’s take a look at the commission as a percentage of each transaction cost.

Tickers

Value

Commission % (Questrade $4.95)

Commission % (TD $9.99)

BNS

$350

1.4%

2.85%

ENB

$285

1.7%

3.51%

T

$450

1.1%

2.22%

TD

$700

0.7%

1.43%

EMA

$480

1.0%

2.08%

REI

$620

0.8%

1.61%

FTS

$740

0.7%

1.35%

In this hypothetical example, it’s very concerning for many of the transactions, more than 1% went toward commissions. As an investor, you want to limit the number of trades you are making and reduce the amount of money you are spending on commissions, as a percentage of the overall transaction,

That’s why I almost always trade only when we have more than $1,000 in cash. That way, the commission fee is only a fraction of a percentage of the overall transaction fee.

So in this example, starting out with around $3,600, would I just buy 1 stock with that entire amount of money?

Yes, that’s exactly how I started with dividend investing. I did it over 12 years ago and I would do the same again now if I were to start fresh with dividend investing.

Having said all that, given the availability of index ETF’s, if I were to start out again, I probably would use $3,600 and purchase an index ETF first, get some instant diversification, THEN start purchasing individual dividend growth stocks. This way, I’d be getting sector diversification at a very low fee and I get to pick dividend stocks.

In case you are new here and you are looking for some dividend investing tutorials to get started, take a look at these articles:

Hi I’m Bob from Vancouver Canada, I am working toward joyful life and financial independence through frugal living, dividend investing, passive income generation, life balance, and self-improvement. This blog is my way to chronicle my journey and share my stories and thoughts along the way.
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19 Comments

I’m in a very similar situation as yourself with regard to having cash on the sidelines and considering what to do with it. In your shoes with $11k and wrestling with whether to wait for January, I’d probably do what you said and nibble a bit (2k-3k) in the market now and then build some or all of that back up for the new TFSA season. That said, I don’t have a crystal ball, either, and it may well turn out that better deals are available in two months if the market drops some more.

I also keep the same rule as you: I don’t like to invest less than $1k at a time so that I keep fees under 1% (I pay $9.95 per commission). Any higher than that is extremely counterproductive; I don’t want the first year of dividends effectively being wasted paying back a commission fee.

Glad to hear writing “The End” was therapeutic and you’re in a better mental space now.

I’ve got plenty of cash on the sidelines too…. but price really aren’t that great yet. Yes, they’re slightly better than earlier this year, but not what I would consider historically cheap.

Still, I do dribble a little bit of money into the market every month, cherry-picking the stuff that’s “on sale”, but I’d really like to see the market about 20% lower before I start spending like crazy.

Rik

October 29, 2018 at 10:43 am

Why not buy dividend-paying stocks at a “discount” with the $11K right now and then on Jan 1st, transfer them “in-kind” to TFSA. Sure you’ll have to pay the capital-gain tax and tax on any dividend you earn in the next 2 months but it is a great way of averaging down on some of the stocks in your TFSA portfolio. Alternatively, you can buy tech stocks like Amazon for cheap right now and either transfer them in-kind to TFSA later or sell them and make some profit and then send the cash to TFSA. Gain scenario: $11K becomes $12K in 2 months. You gain $1K and pay tax on $500 (50% of gains). Let’s assume you pay a marginal tax of 30% ($150), you still end up turning your $11K into $11850 ($850 pocketed, $150 taxes) in 2 months. Please let me know if I got something wrong as I have been using this way of thinking ever since I started self-investing last June.

I would also like to see the market go down another 20%. I do buy weekly using my Robinhood account transaction free. However most of my cash are on the sideline or invested in real estate. Since I cannot time the market I find it better to buy regularly not matter what the market gyrations bring. Thanks for the article nice insights.

It seems to like like you can invest more than $11,000 per year and you end up maxing your RRSP and TFSA anyways so if there is a stock you feel is discounted and worth buying, take a small position and review next month again.

The taxes are minimal when you think about the potential profit if it’s really discounted. Some day, you will have to overflow outside the TFSA and RRSP anyways – I know I have already.

In your small porfolio example, that’s exactly why Computershare is a great option. My kids have 3 stocks and invest around $50 to $100 monthly or quarterly at $0 in commission and you even get the fractional shares. It’s a gravy train with all the fractions at work. It only works as a non-registered account but then if you don’t have much to invest, chances are that your tax rate is also low and you don’t earn much in dividend anyways

That’s very true. We are investing in taxable accounts already so adding more shares wouldn’t matter in the big scheme. May just nibble on some stocks with taxable accounts before January and try to save up $11k in the mean time.

First, I say stick with your routine and do the January TFSA Second, hopefully your co-worker runs as fast as possible from the 3% MER Third, have you considered the personal ethics of individual stocks you choose? I sold all my oil company stocks after I moved to BC and realized the outside perspective to the industry.

Routines are good eh? I have thought about personal ethics and even owning big oil/pipeline companies, I can cast my vote in the annual meetings to voice my opinions. If you invest in index funds, you can’t do that. 🙂

I think the volatility will continue. If you see any good deal, I’d buy some. You still have a good income so you can build up your TFSA fund later. We had some cash on the sideline, but I just invested in a real estate crowdfunding project. In a few months, we’ll have more cash again. Maybe it’ll be a good time to invest then. Good luck!

i just raised some cash a few weeks ago but had been meaning to do that. i don’t think i’ll touch it until it gets above a certain % of the overall portfolio, like manual rebalancing. i remember around ’07 the market dipped about 10% and i deployed all our cash and it went down another 40% in the big recession so i didn’t catch the falling knife, but i tried. i strongly agree with a person paying trading fees on small investment amounts. i had the same conversation with a coworker buying 500 dollar positions at 7 bucks/trade commission. he didn’t listen AND he bought crappy ill-advised names.

My mission is to show that financial independence is indeed possible for a family with kids while living in an expensive city like Vancouver.

My focuses include dividend & ETF investing, financial independence, early retirement, happiness, fruguality, and finding the right personal balance between saving for the future and enjoying life today.